The Severe Impact of Debt of Small Businesses

One of the areas where too much outstanding debt can have the most severe impact is in the world of small businesses. With many local businesses already struggling because of difficult economic times, even the slightest hiccup in their debt collection procedures can send ripple effects through your entire community.

Cash flow is the life blood of any small business, and making sure that accounts receivable are all current and in good standing is critically important. Should those customers a business has extended credit to suddenly stop making their payments, here are some of the things that can happen.

Inventory Dries Up

Typically, the first way that too much outstanding debt will impact a small business is that the people in charge will have to cut back on the amount of inventory they can afford to purchase. This results in less options for their customers and a lower overall experience.

Should this happen to a local hardware store, they might have to skimp on the number of different bolt sizes they stock. But once the local contractors realize they can’t get everything they need, they are likely to move on to one of the big box stores.

Employees Stop Getting Paid

Another thing that often happens when small businesses aren’t bringing enough money in is that the payroll checks they issue to their employees start to bounce. This is a common occurrence in local bars and restaurants, but can also happen just as easily if a small business isn’t getting paid from their customers fast enough.

If the local contractors we looked at in the previous example stop receiving payments for jobs that they have already completed, their accounts are going to dwindle and eventually run dry, leaving their employees holding the bag.

Local Governments Loose Tax Revenues

Possibly the biggest negative factor when small businesses suffer from bad debt collection rates is that those businesses then fail to meet their tax obligations with the state and local governments.

In order to maintain many of the luxuries we all count on, our local governments rely on taxes generated from local businesses. If those businesses fail to meet their tax obligations, we all suffer as a result.

Owners Lose Everything

The owners of small businesses that are unable to collect on the debts that are owed to them might be the most depressing aspect of the way debt can damage lives. These are generally very hardworking and honest people who are only struggling because they made the decision to offer credit to the wrong customers.

Customers Suffer From Less Choices

One of the most overlooked aspects of the impact debt can have on small businesses is that when those businesses eventually go under, we are all left with fewer options. Whether we are talking about small medical practices, legal offices, or restaurants, having more options to choose from is always a good thing for consumers.

Of course, these negative ways that debt can impact a small business could all be avoided by putting better collection standards in place. On top of that, partnering with a quality debt collection agency can also increase the returns that those small businesses get on the arrangements that go south.

By |2017-03-12T15:12:07+00:00November 12th, 2016|Blog|0 Comments

About the Author:

Graduated from University of Utah - business degree 1990. Served in US Army as an interrogator / linguist, then as a tactical intelligence officer - Military Intelligence 1986-1990. Managed Western US sales operations for NY based collection agency 1990-1992. Founded Direct Recovery Associates, Inc. 1992-present